CNK & Associates LLPINCOME COMPUTATION AND DISCLOSURE STANDARDS – BACKGROUND AND GENERAL...

CNK Direct Tax Tracker Issue 2 of 2016-17 CNK & Associates LLP www.cnkindia.com

CNK Direct Tax Tracker Issue 2 of 2016-17 For Private Circulation only

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INCOME COMPUTATION AND DISCLOSURE STANDARDS –

BACKGROUND AND GENERAL PRINCIPLES

1. Background

The Income Computation and Disclosure Standards (ICDS) earlier known as Tax Accounting

Standards (TAS) were first introduced by the CBDT in 2012. Initially 14 TAS were issued and on

basis of comments and suggestions received from the stakeholders, the CBDT revised and

issued 12 drafts ICDS for public comments in December 2014.

On 31st March, 2015, the Central Government notified 10 ICDS with effect from 1st April, 2015

vide notification No. 32/2015 [F.NO.134/48/2010-TPL] dated 31 March 2015. The introduction

of these ICDS will significantly alter the way the taxable income is computed and have a

significant impact on the tax computation. Though there have been various representations to

postpone the applicability of the ICDS, the same have not been acceded to.

Introduction of the ICDS will involve additional compliance and significant effort for computing

the taxable income. It will also lead to considerable increase in litigation as there is ambiguity

on the manner in which the tax is to be computed in accordance with the ICDS. There is likely to

be significant mismatch between the book profit under MAT and computation under normal

provisions which could lead to unintended double taxation.

Impact of the ICDS is to be disclosed in the Income Tax Return (ITR) forms for A.Y. 2016-17

relevant to financial year 2015-16 which have been notified by the CBDT on 30th March, 2016.

Disclosures as well as impact of the ICDS are also likely to be a part of the Tax Audit Report,

which has however not been notified till date.

The purpose of this note is to provide a general guideline on the major areas of likely impact on

the computation of income for the year ended 31st March 2016. For any specific query that you

may have, the Tax Team would be happy to assist.

2. General Principles

Following are the general principles regarding the ICDS:

(i) ICDS are applicable for computation of income chargeable under the head “Profits and

Gains from Business and Profession” and “Income from Other Sources”.

(ii) ICDS are applicable to all assessees.

(iii) ICDS are applicable only to taxpayers that follow mercantile system of accounting.

(iv) The ICDS are only for the purpose of computation of income and not for maintaining

books of accounts. However, practically one may need to prepare memorandum tax

accounts.

(v) ICDS is not applicable for computation of Book Profit for the purpose of MAT Provisions

under section 115JB.

(vi) In case of conflict between ICDS and the Income Tax Act, the provisions of the Act will

prevail.



(vii) ICDS shall not apply to assessees not required to maintain books of account and

covered under the provisions of presumptive income as per sections 44AD and 44AE of

the Act.

(viii) Non-compliance of ICDS would result in Best Judgment Assessment as per the

provisions of Section 144 of the Act.

INCOME COMPUTATION AND DISCLOSURE STANDARD I – ACCOUNTING POLICIES

Scope: ICDS I deals with significant accounting policies. The accounting policies refer to the specific accounting principles and the methods of applying those principles adopted by a person. Accounting policies are to be chosen to represent true and fair view of state of affairs and of the income and expenditure incurred during the year. The following are fundamental accounting assumptions that form the basis for maintenance of books of

accounts are as under:

a) Going Concern

b) Consistency

c) Accrual

If any of the above assumptions are not followed, it must be disclosed.

Comparison between AS and ICDS - Considerations for selection and change in accounting policies:

AS 1 – Disclosure of Accounting Policies ICDS I – Accounting Policies

Prudence

Concept of prudence is one of the fundamental pillars of accounting, which requires recognition of all expected losses and liabilities in the books on best estimate basis. Recognition of anticipated profits is not required.

The concept of ‘Prudence’ does not find place in ICDS. Hence Mark to Market losses are not to be recognized unless covered by any specific ICDS. For e.g. Mark to Market loss can be recognized on certain revenue items as per ICDS VIII on Effects of Fluctuation in Foreign Exchange. ICDS is silent on Mark to Market gains

Materiality

AII accounting and treatment of items based on materiality

The concept of ‘Materiality’ does not find place in ICDS. This could result in various adjustments to the computation of income such as small items of capital expenditure written off.

Substance over Form

The treatment and presentation of transactions and events are be governed by their substance and not merely by the legal form

Same as AS I

Change in Accounting Policy

Is allowed only if required by statute, or compliance with AS, or for more appropriate presentation

Permitted for any “reasonable cause”



Impact on Computation of Income / Disclosure requirements:

All significant policies should be disclosed.

If fundamental accounting assumptions are not followed, disclosure of the same is required.

Non recognition of Materiality would lead to increase in compliance burden and increase in cost of

compliance. One example could be of valuation of inventories, especially in case of services, since even

very insignificant items may have to be valued. Another example could be capitalization of small value

items as per accounting policy. Adjustments would need to be made in the computation of total

income.

Mark-to-market or expected loss not to be recognized unless otherwise provided by other ICDS

If a change is made in the accounting policy which has no material effect for the current year but which

is likely to have a material effect in later years, the fact of such change shall be appropriately disclosed

in the previous year in which the change is adopted

Transitional Provisions:

All contracts or transactions existing on the 1st day of April, 2015 or entered into on or after the 1st

day of April, 2015 have to be dealt with in accordance with the provisions of this standard after taking

into account the income, expense or loss, if any, recognised in respect of the said contract or

transaction for the previous year ending on or before the 31st March, 2015.

INCOME COMPUTATION AND DISCLOSURE STANDARD II – VALUATION OF INVENTORIES

Scope:

ICDS II is applicable for valuation of inventories except:

a. Work-in-progress (WIP) arising under ‘Construction Contract’; b. WIP which is dealt with other ICDS; c. Shares, debentures and other financial instruments held as stock-in-trade which are dealt with

by ICDS on securities; d. Producers’ inventories of livestock, agriculture and forest products, minerals oils, ores and

gases to the extent that they are measured at NRV; e. Machinery spares which can be used only in connection with tangible fixed asset and their use

is expected to be irregular, which is dealt with the ICDS on tangible fixed assets. Inventories are defined as assets held for sale in the ordinary course of business, or in the process of

production for such sale, or in the form of materials or supplies to be consumed in the production

process or in the rendering of services.

The Net Realizable Value (NRV) of inventory is the estimated selling price in the ordinary course of

business as reduced by the estimated costs of completion and the estimated costs necessary to make

the sale.



Comparison between AS and ICDS – Valuation:

AS 2 – Inventories ICDS II – Valuation of Inventories

Valuation of Inventories

At cost or NRV whichever is lower Same as AS

Valuation of work- in- progress (WIP) for Service Providers

Does not apply to WIP in the ordinary course of business of service providers.

Applicable to WIP arising in the course of business of service providers. Cost of Service would consist of labour and other cost of personnel directly engaged in providing the service including supervisory personnel and attributable overheads

Determination of cost of purchase

Cost of purchase would consist of purchase price, duties & taxes(other than recovered from tax authorities), freight inwards and other expenditure directly relating to acquisition

Same as AS

Valuation of inventories in case of dissolution of Partnership Firm, AOP/BOI

Silent. In case of dissolution of partnership firm, AOP/BOI, notwithstanding whether business is discontinued or not, the inventory on date of dissolution shall be valued at NRV.

Cost Formulae

Standard Cost is also acceptable cost formula Specific Identification for items that are not ordinarily interchangeable and goods/ services produced and segregated for specific projects. Items other than the above should be assigned by using FIFO or Weighted Average cost.

Other points to be considered:

Difficulty would arise in valuation of WIP of service provider in case of services whose chargeability

depends on success of the service, which are contingent in nature.

Valuation of inventory as per ICDS shall be at NRV on dissolution of Partnership firm, AOP, BOI

irrespective of whether the business is discontinued or not. The same is contrary to the law laid down in

Sakthi Trading Co v CIT [250 ITR 871 (SC)] and A.L.A Firm v CIT [189 ITR 285 (SC)]. Therefore, as per ICDS

even if the business is continued after dissolution, inventory should be valued at NRV.

Interest and Other Borrowing Cost shall not be included in the cost of inventories unless they meet the

criteria for recognition of interest as a component of the cost as specified in ICDS on borrowing cost (i.e.

where inventories require a period of twelve months or more to be in a saleable condition)

Method of valuation of inventory shall not be changed without reasonable cause; however reasonable

cause is not defined.



Impact on Computation of Income and Disclosure Requirement:

Valuation of Inventory for service providers is required to be done.

Valuation of Inventory at NRV on dissolution of partnership firm/ AOP/BOI even if business is continued.

Accounting policies adopted in measuring inventories including cost formulae used; and total carrying

amount of inventories and its appropriate classification.

Transitional Provisions

Interest and other borrowing costs, which are included in the cost of the opening inventory as on the

1st day of April, 2015, shall continue to be taken into account for determining cost as long as it

continues to remain part of inventory.

INCOME COMPUTATION AND DISCLOSURE STANDARD III- CONSTRUCTION CONTRACTS

Scope:

This ICDS should be applied in determination of income of a contractor arising from construction

contract.

Construction contract is defined as a contract negotiated for the construction of an asset or assets that

are interrelated and interdependent in terms of their design, technology and function and includes

rendering of services related to the said construction. Construction contract would also include contract

for destruction or restoration of assets and restoration of environment following demolition of assets.

Comparison between AS and ICDS:

AS 7 – Construction Contracts ICDS III – Construction Contracts

Recognition of Revenue

Revenue shall be recognised using Percentage of Completion Method (POCM) if it is possible to reliably measure the outcome

Revenue is to be recognised using POCM if there is reasonable certainty of ultimate collection

Recognition of retention money

Silent on retentions Normally recognised only when right to receive such sum is established.

Retention money is to be included in the contract revenue as per POCM basis.

Recognition of Expected Loss

Is to be recognised in full To be recognised only when actually incurred following POCM- i.e. to the extent of percentage of completion

Recognition of Actual losses

Is to be recognised in full To be recognised to the extent of percentage of completion

Early stage of completion of contract

Does not define early stage of completion.

Early stage means contract which has not crossed 25% of its completion. For these contracts if outcome cannot be estimated revenue shall be recognised only to the



AS 7 – Construction Contracts ICDS III – Construction Contracts

extent of cost incurred. Therefore it is mandatory to recognise revenue once the contract extends beyond 25% of its stage of completion.

Contract Cost relating to future activity

It is to be recognised as an asset when it is probable that such costs are recoverable.

Recognised as an asset irrespective of probability of recovery.

Reversal of contract revenue recognised

Reversal of contract revenue booked as income is not allowed. However the same can be separately provided to reflect the uncertainty of collectability.

Will be allowed as a bad debt as per amended Sec. 36(1)(vii) of the Income Tax Act 1961 introduced by Finance Act 2015.

Other Points to be considered:

Contract revenue comprises of initial amount of revenue agreed in the contract including retentions

and variations in contract work, claims and incentive payments to the extent that it is probable that

they will result in revenue and are capable of being reliably measured.

Contract cost comprises of costs that relate directly to the specific contract, other allocable costs, such

other costs as are specifically chargeable to the customer under the terms of contract, allocated

borrowing costs in accordance with ICDS IX and costs that are incurred in securing the contract if they

can be separately identified and it is probable that the contract shall be obtained.

Stage of completion of a contract to be determined with reference to any of the following parameters:

a. Proportion of contract costs (Excluding Advance Payments to sub-contractors and costs that relate to future activity of the contract) incurred upto date of reporting to estimated total contract costs; OR

b. Survey of the work performed; OR c. Completion of the physical proportion of the work

The ICDS provides that progress payments and advances received from customers are not determinative of the stage of completion of a contract.

Impact on Computation of Income and Disclosure requirements:

Recognition of retention money as contract revenue will result into earlier taxability. Also, retention

money considered as income as per ICDS, may be accounted as income in the later years in the books of

accounts as per normal accounting practice when contract conditions are satisfied, which may result in

payment of tax under MAT, leading to double taxation.

Recognition of expected losses on POCM basis will have impact on book profits of later years and could

result into payment of taxes as per MAT provisions.

For entities following Completed Contract Method (CCM), use of POCM for computation of Income as

per ICDS will result in higher book profits in the year of recognition of revenue in the books of accounts,

resulting in payment of tax under MAT provisions leading to double taxation.



Future / anticipated / actual losses are not fully deductible. Hence tax impact will be postponed basis

the percentage of work completed.

The amount of contract revenue recognised as revenue in the period and the methods used to determine the stage of completion of contracts in progress have to be disclosed.

In respect of contracts in progress on the reporting date, the amount of costs incurred and recognised profits (less recognised losses) upto the reporting date, amount of advances received and amount of retentions.

Transitional Provision:

Contracts commenced prior to 31st day of March, 2015, but pending completion as on 31st March 2015 shall be recognised in accordance with the provisions of ICDS using POCM.

Revenue, costs or expected loss, if any, recognised for the said contract for any previous year commencing on or before the 1st day of April, 2014 shall be taken into account for recognising revenue and costs of the said contract in the subsequent years.

INCOME COMPUTATION AND DISCLOSURE STANDARD IV- REVENUE RECOGNITION

Scope:

This standard deals with recognition of revenue arising in the course of ordinary activities of a person

from sale of goods, from rendering of services or from the use by others of the person’s resources

yielding interest, royalties or dividends. This Standard would not apply to revenues dealt by other

specific ICDS e.g. Construction Contracts, Government Grants, Securities etc.

Comparison between AS 9 and ICDS IV:

AS 9 – Revenue Recognition ICDS IV- Revenue Recognition

Method to be adopted for recognizing revenue for service providers

Proportionate Completion Method or Completed Service Contract Method (CSCM)

Percentage Completion Method (POCM) except in early stages. Early stage means contract which has not crossed 25% of its completion. For such contracts, if outcome cannot be estimated revenue shall be recognised only to the extent of cost incurred. It is mandatory to recognise revenue once the contract extends beyond 25% of its stage of completion.

Concept of Prudence

Revenue to be recognised only if there is reasonable certainty of ultimate collection.

ICDS has not incorporated the concept of prudence. Hence revenue cannot be postponed merely on the grounds of inability



AS 9 – Revenue Recognition ICDS IV- Revenue Recognition

to measure the revenue reliably unless otherwise stated in any other ICDS

Foreseeable/ Estimated Losses

Estimated or imminent losses to be fully recognised irrespective of stage of completion

Can be recognised only to the extent of percentage of work completed

Reversal of revenue recognised

Reversal of revenue is not allowed, however provision to reflect the uncertainty of collectability should be made.

Will be allowed as a bad debt as per amended Sec. 36(1)(vii) of the Income Tax Act 1961 introduced by Finance Act 2015.


The provisions of ICDS III applicable to construction contracts on method of recognition of revenue and

associated cost shall apply to service providers on mutatis mutandis basis.

The stage of completion of service can be determined on the basis of percentage of cost incurred,

survey of work performed or completion of the physical proportion of the work.

As per the provisions of section 36(1)(vii), bad debt shall be allowed as a deduction in the computation

of income only if it was written off in the books of accounts. Income booked and treated as receivable

under ICDS may not get reflected as a debt in books of accounts following the principles of prudence.

The said amount offered to tax under ICDS turning bad therefore will not be written off as bad debt in

books of accounts. Since write off of debt in books is a condition for allowability of bad debt, proviso to

section 36(1)(vii) has been inserted permitting the claim of debt turning bad even if it is not written off

in the books of accounts.

In an agency business, revenue is the amount of commission.

Interest shall be determined on time basis based on the outstanding amounts and applicable interest

rates. Hence where interest accrues on a date other than 31st March, calculation of broken period

interest till the end of the year for each of the investments would need to be done if the ICDS is

applicable.

ICDS is not applicable to interest received on compensation or enhanced compensation and it is to be offered to tax as per the provisions of Section 145A (b) i.e. on receipt basis.

Effect on Computation of Income/ Disclosure requirements:

Taxpayers, who were following CSCM for the purpose of accounting as well as for computation of Income, will now be required to follow POCM as per ICDS. This would result in preponing of income and consequential tax thereon. Since there is no materiality threshold, all service providers would be impacted. Use of POCM for computation of Income as per ICDS would result in higher book profits in the year of recognition of revenue in the books of accounts following CSCM, this could result in payment of tax under MAT provisions leading to double taxation.



Unlike ICDS since AS 9, permits recognition of revenue on "systematic & rational basis” the same may result into difference in recognition of income as per books and as per ICDS.

If the security is sold before interest is received, the interest upto the date of sale will be taxable in the hands of the transferor though the same will actually be received by the transferee.

In a transaction involving sale of goods, total amount not recognised as revenue during the previous year due to lack of reasonable certainty of its ultimate collection along with nature of uncertainty.

The amount of revenue from service transactions recognised as revenue during the previous year and the method used to determine the stage of completion of service transactions in progress. For service transactions in progress at the end of previous year, the amount of costs incurred and recognised profits (less recognised losses) up to end of previous year, the amount of advances received, and the amount of retentions.


Services commenced prior to 31st day of March, 2015, but pending completion as on 31st March 2015 shall be recognised in accordance with the provisions of ICDS using POCM considering revenue, costs or expected loss, if any, already recognised. If foreseeable loss is already recognised in past, transitional provision does not require reversal on account of applicability of this Standard. Test for recognition of revenue from other than service transaction continues to be the same and hence may not have any transitional impact.

INCOME COMPUTATION AND DISCLOSURE STANDARD V- TANGIBLE FIXED ASSETS

Scope:

This ICDS deals with the treatment of tangible fixed assets.

Comparison between AS and ICDS

AS 10 – Accounting for Fixed Assets ICDS V – Tangible Fixed Assets

Applicability

It deals with all fixed assets including goodwill except forest, wasting assets, and livestock.

It deals only with tangible fixed assets such as land, building, machinery, plant, furniture held with the intention of being used for the purpose of producing or providing goods or services and is not held for sale in the normal course of business.

Cost of Fixed Asset

The cost of an item of fixed asset comprises its purchase price, including import duties and other non-refundable taxes or levies and any directly attributable cost of bringing the asset to its working condition for its intended use. Any trade discounts and rebates are deducted

It is similar as stated in AS 10 except the words used are “actual cost” instead of cost as per AS 10.



AS 10 – Accounting for Fixed Assets ICDS V – Tangible Fixed Assets

in arriving at the purchase price.

Determination of actual cost of tangible Fixed Asset acquired in exchange of another assets or in exchange of shares or other securities

In case of acquisition of a fixed asset in exchange of another asset, the cost shall be determined by reference either to the asset given up or asset acquired whichever is more clearly evident.

In case of acquisition of a fixed asset in exchange of shares or others securities, the cost shall be the fair market value of the asset acquired or fair market value of securities given up whichever is more clearly evident.

In case of acquisition of a tangible fixed asset in exchange of another asset, the fair value of the tangible fixed asset so acquired shall be treated as its actual cost.

In case of acquisition of a tangible fixed asset in exchange of shares or other securities, the fair value of the tangible fixed asset so acquired shall be treated as its actual cost.

Valuation of assets in special cases

In case of hire purchase transaction Assets are required to be recorded at their cash value by the hirer.

Assets purchased for consolidated price Apportioned on fair basis as determined by competent valuer’s report.

In case of hire purchase transaction Silent on this issue.

Assets purchased for consolidated price Apportioned on “fair basis”.

Treatment of expenditure incurred during the interval when the project was ready to commence its production and actual production:

Expenditure incurred during this interval should be written off as expense or may in certain cases be deferred over a period of 3-5 years after commencement of production.

Silent on the treatment of expenses.

Treatment of Inspection Cost

Inspection cost incurred at the time of initial installation of tangible fixed asset should be capitalised. However, cost incurred after initial installation shall be charged to Profit & Loss A/C.

Silent on the treatment of inspection cost. It is merely stated that any expenditure which increases future benefits beyond its previously assessed performance, can be added to the cost of the asset. Since inspection cost does not normally increase future benefits, it would not be permitted under ICDS to be added to the cost of fixed asset.

Treatment of Revaluation of Assets

AS deals with revaluation of fixed assets and the accounting treatment and disclosures.

ICDS does not deal with revaluation. As per the Income Tax Act, revaluation is not considered as an adjustment to the cost of the asset. The effect of revaluation is also ignored for computation of book profit for the purpose of MAT.




Actual Cost

As per ICDS, actual cost of fixed assets includes purchase price, import duties and other non-refundable

taxes or levies and any directly attributable cost of bringing the asset to its working condition for its

intended use. Any trade discounts and rebates are deducted in arriving at the purchase price.

Actual cost is defined in section 43(1) of the Income Tax Act which as actual cost of assets to the

assessee reduced by that portion of cost as has been met directly or indirectly by any other person or

authority.

In case of any difference in ICDS and the Act, the provisions of the Act shall prevail.

Fair Basis as per ICDS

Since fair basis is not defined under ICDS it would become subjective and be prone to litigation.

Impact on Computation of Income/ Disclosure Requirements: Following disclosures are to be made in respect of tangible fixed assets:

Description of asset or block of assets, rate of depreciation, actual cost or opening WDV of the asset,

additions with date of put to use or deductions during the year with dates, adjustment relating to

foreign exchange fluctuation, subsidy or reimbursement received, Vat claimed and allowed,

depreciation and WDV of the asset at the end of the year


The actual cost of tangible fixed assets, acquisition or construction of which commenced on or before

the 31st day of March, 2015 but not completed by the said date, shall be recognised in accordance with

the provisions of this standard. The amount of actual cost, recognised for the said assets for any earlier

years shall be considered. Depreciation will be dealt with under the provisions of the Act.

INCOME COMPUTATION AND DISCLOSURE STANDARD VI – EFFECTS OF CHANGES IN FOREIGN

EXCHANGE RATES

Scope:

ICDS VI on Effects of Changes in Foreign Exchange Rates deals with treatment of transactions in foreign

currencies, translating the financial statements of foreign operations and treatment of foreign currency

transactions in the nature of forward exchange contracts

Comparison between AS and ICDS – Applicability and Valuation:

AS 11 -- Effects Of Changes In Foreign Exchange Rates

ICDS VI - Effects Of Changes In Foreign Exchange Rates

Foreign Exchange Fluctuations on Monetary Items

Gain or Loss to be accounted on actual settlement. Same as AS 11, subject to provisions of section



AS 11 -- Effects Of Changes In Foreign Exchange Rates

ICDS VI - Effects Of Changes In Foreign Exchange Rates

If monetary items are outstanding at year end, it should be Marked to Market (MTM) by applying closing rate

43A read with Rule 115 for acquisition of fixed assets from a country outside India wherein the foreign exchange fluctuation on actual settlement would be adjusted against the cost of asset.

Foreign Exchange Fluctuations on Non-Monetary Items

Non-Monetary Items carried at historical cost

Converted at the exchange rate on date of transaction

Converted at the exchange rate on date of transaction

Non-Monetary Items carried at fair value

Converted at closing rate Exchange difference on conversion at the closing rate is not considered as income or expense.

Integral Operations (eg. Liaison Office)

Monetary Items

To be converted at closing rate Same as AS 11, subject to provisions of section 43A read with Rule 115 for acquisition of fixed assets from a country outside India wherein the foreign exchange fluctuation on actual settlement would be adjusted against the cost of asset.

Non-monetary Items

To be converted at closing rate Such exchange difference is not recognized as income or expenses.

Non-integral Operations (eg. Independent Branch)

Capital Items both monetary and non-monetary:

MTM gains/ losses to be transferred to Foreign Currency Translation Reserve

Converted at closing rate

Revenue Items

MTM gains/ losses to be transferred to Foreign Currency Translation Reserve

Converted at the exchange rate on the date of transaction/ closing rate as applicable

Forward Exchange Contracts

For Trading/Speculation/Firm Commitments/Highly Probable Forecast

Loss or Gain is to be accounted on MTM basis Loss or Gain including premium/ discount is to be recognized on actual settlement

For Other Contracts:

Premium/Discount is to be amortized over the life of the contract. Loss or gain is accounted on MTM Basis

Premium/Discount is to be amortized over the life of the contract. Loss or gain is allowed on MTM Basis

Other points to be considered:

Translation and recognition of exchange differences in cases referred to in section 43A or Rule 115 shall

be carried out in accordance with the provisions contained therein

When there is a change in the classification of a foreign operation, the translation procedures

applicable to the revised classification should be applied from the date of change in the classification.



No distinction between capital and revenue items. Hence MTM gains/ losses to be recognized even on

tangible fixed assets in case of non-integral operations.

ICDS does not make a distinction between capital and revenue

Effects on Computation of Income/ Disclosure requirements:

In case of monetary items, gain or loss is to be recognized on MTM basis, subject to the provisions of

Section 43A of the Act and Rule 115 of Income Tax Rules.

However this may be contrary in case of exchange fluctuation on capital assets (other than imported

assets) where section 43A does not apply.

In case of non-monetary items carried at historical cost, there will be no impact on the computation. In

case of non-monetary items carried at fair value, ICDS does not permit recognition of exchange

difference. Hence the exchange gain/loss as per books of accounts will have to be reduced/added back

while computing income.

In case of trading/speculation/firm commitments/highly probable forecast, loss or gain has to be

adjusted only at the time of settlement; resulting in mismatch between book profit and taxable income.

Forex derivatives like cross currency swaps, interest rate swaps are not covered by this ICDS. Hence

MTM losses or expected losses on such contracts may not be deductible in view of the provisions of

ICDS 1.


All foreign currency transactions undertaken on or after 1st April, 2015 would be recognized in

accordance with the ICDS

Exchange differences arising in respect of monetary items or non-monetary items, on settlement during

the year or on conversion at the last day of the year would be recognised in accordance with the

provisions of this ICDS after taking into account amount already recognised in the earlier years.

Financial statements of foreign operations would be translated using principles and procedures

specified in this ICDS after taking into account amount already recognised in the earlier years.

All forward exchange contracts existing on 1st April, 2015 or entered thereafter would be dealt with in

accordance with the provisions of this ICDS after taking into account income or expenses recognised in

earlier years.

INCOME COMPUTATION AND DISCLOSURE STANDARD VII – GOVERNMENT GRANTS

Scope

ICDS VII deals with the treatment of government grants. “Government grants” are defined as assistance

by government in cash or kind to a person for past or future compliance. Government grants can be in

the form of subsidies, cash incentives, duty drawbacks, waiver, concessions, reimbursements, etc.



However this ICDS does not deal with government assistance other than in the form of government

grants and government participation in the ownership of the enterprise

Recognition Criteria

Government grants are to be recognized only when there is a reasonable assurance that the person

shall comply with the conditions attached to them and the grant would be received. However

recognition cannot be postponed beyond the date of actual receipt.

Comparison between AS and ICDS – Recognition and Treatment of Government Grants

AS 12 – Accounting for Government Grants ICDS VII – Government Grants

Recognition of Government Grants:

When there is reasonable assurance that the person would comply with the conditions attached to them and grant would be received

When there is reasonable assurance that the person would comply with the conditions attached to them and the grant would be received. However recognition cannot be postponed beyond the date of actual receipt.

For Depreciable Assets:

Can be reduced from the asset or can be treated as deferred income over the useful life of the asset

Must be reduced from the cost of the asset or from the WDV of block of assets. No option to recognize as deferred income over the useful life.

For Non-Depreciable Assets or Assets requiring fulfilment of certain obligations:

Can be reduced from the cost of the asset or credited to the capital reserve

To be treated as deferred income over the period over which the cost of obligation is charged to income Grant for non-depreciable asset with no obligation may be required to be recognized upfront as income, in the year of recognition.

For Other Grants:

Treated as income in the year of receipt Same as AS 12

For Non-Monetary Assets given at concessional rate:

To be accounted for on the basis of their acquisition cost

Same as AS 12

For Compensation of Expense/ Loss:

Recognised in the year in which the grant is receivable.

Same as AS 12


This ICDS does not cover grants in the nature of promoter’s contribution.

Where the government grant is not directly relatable to the asset acquired, amount of grant will be

proportionately reduced from the cost/WDV of the assets for which the grant is received.

Section 2(24)(xviii) is amended by the Finance Act, 2015 to include assistance in the form of subsidy or

grant or cash incentive or duty drawback or waiver concession or reimbursement by whatever name

called by any government authority.



In case of refund of government grants:

In case of fixed assets – actual cost or WDV to be increased

(i) Depreciation on revised value to be provided prospectively

(ii) If refund exceeds any deferred credit or where no deferred credit exists – amount to be

charged to Profit & Loss Account.

Impact on Computation of Income/ Disclosure requirements:

ICDS requires recognition of subsidy related to non-depreciable assets as income or as deferred income

if there is a cost of obligation, as against treatment in the books, where it is reduced from the asset or

shown as capital reserve.

Nature and extent of government grants deducted from the actual cost of asset or WDV during the

previous year

Nature and extent of government grants recognized during the year as income

Nature and extent of government grants not recognized by way of deduction from actual cost of asset

or WDV

Nature and extent of government grants not recognized as income during the year


All Government grants which meet recognition criteria to be recognised for the previous year

commencing on or after 1st April, 2015 in accordance with the provisions of this ICDS after taking into

account the amount of the Government grant recognised for any earlier years.

INCOME COMPUTATION AND DISCLOSURE STANDARD VIII – SECURITIES

Scope:

ICDS VIII deals with securities held as stock-in-trade. However, it does not apply to -

a) Insurance Companies; Mutual Funds; Venture Capital Funds; Banks; Public Financial Institutions

b) Derivatives in view of the specific definition of Securities in the Standard The standard may not be applicable to FIIs/FPIs, since securities are deemed to be capital assets in their

hands as per amendment in Section 2(14) of the Act defining Capital Asset.

Recognition:

Securities to be recognised at actual cost which includes purchase price, brokerage, fees, tax, duty, or

cess.

Securities acquired in exchange of another security / asset, actual cost will be the fair value of security /

asset acquired.



Securities held as stock-in-trade are to be valued at cost initially recognised or net realisable value

whichever is lower.

Comparison between AS and ICDS – Applicability and Valuation:

AS 13- Accounting for Investments ICDS VIII - Securities

Applicability

Covers long term, current investments but excludes Securities held as stock in trade

Deals only with Securities held as stock in trade

Approach for Year-End Valuation

Individual Security Approach for year-end valuation

Portfolio (Bucket) Approach for year-end valuation

Valuation of Unquoted Investments

Unquoted Investments valued at lower of cost or net realizable value

Unquoted investment to be valued at cost

Method of Valuation

Weighted Average Method to be used to determine the cost where specific identification not possible

FIFO method to be used to determine the cost where specific identification not possible

Impact of Portfolio (Bucket) Approach can be understood by the following example:

Individual Security Cost NRV Valuation

Company A 100 25 25

Company B 100 35 35

Company C 100 20 20

Company D 100 300 100

400 380 180

Valuation (AS-13) 180

Valuation (under ICDS) 380


Loss, if any, in value of unquoted investments would be realizable only on disposal.

The comparison of actual cost and NRV should be done category-wise and not for each individual

security. The securities are to be classified into following categories:

(a) Shares

(b) Debt Securities

(c) Convertible Securities

(d) Any other securities not covered above

ICDS does not specify when securities can be considered as stock-in-trade. Therefore, if the Assessing

Officer takes a stand, that securities are stock in trade and not investments as disclosed by assessee, the

applicability of this Standard will have to be considered.



Impact on Computation of Income:

For the purpose of computation of income, any reduction in value within a class of asset would be off-

set against the gains within that class. In other words, Portfolio (Bucket) approach results in accelerated

taxation of appreciation.

Where a security becomes thinly traded during a particular year, there could be a notional gain in that

year as that security may need to be recognized at cost.

In case of conversion of convertible debentures/bonds etc. held as stock in trade to equity shares, fair

value of equity shares would be considered as cost of shares, which will also result in notional gain/loss.

Interest relating to a period prior to acquisition of a debt security must be reduced from the cum-

interest cost.

Where the actual cost initially recognized cannot be ascertained with reference to specific

identification, the cost shall be determined on FIFO basis. Since weighted average cost cannot be used

to determine actual cost, it could have a significant impact on the income computation (for example in

case of sale of bonus shares).

INCOME COMPUTATION AND DISCLOSURE STANDARD IX- BORROWING COSTS

Scope

ICDS IX deals with treatment of borrowing cost. However it does not deal with the actual or imputed

cost of owner’s equity and preference share capital.

Definition

Borrowing costs are interest and other costs incurred by a person in connection with the borrowing of

funds and include:

i. Commitment charges on borrowings;

ii. Amortised amount of discounts or premiums relating to borrowings;

iii. Amortised amount of ancillary costs incurred in connection with the arrangement of

borrowings;

iv. Finance charges in respect of assets acquired under finance leases or under other similar

arrangements.

Comparison between AS and ICDS – Qualifying assets and capitalisation

AS 16 – Borrowing Costs ICDS IX – Borrowing Cost

Qualifying Assets

A qualifying asset is an asset that necessarily takes a substantial period of time to get ready for its intended use or sale. Ordinarily a period of twelve months is considered as a substantial period of time.

Land, building, machinery, plant or furniture, being tangible assets; Know-how, patents copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being




intangible assets;(Not included in the definition of qualifying asset as per AS 16) Inventories that require a period of twelve months or more to bring them to saleable condition.

Commencement of Capitalisation

Date when activities necessary for construction/production/acquisition of an asset commence.

In case of general borrowing, from date on which funds were utilised. In case of specific borrowing, from date on which funds were borrowed.

Quantification of Borrowing Costs

Funds borrowed specifically for acquisition/construction/production of qualifying asset should be capitalized at the actual cost of borrowings incurred during the period the funds were so borrowed. The amount of borrowing costs eligible for capitalisation should be determined by applying a capitalisation rate to the expenditure on that asset.(The capitalisation rate should be the weighted average rate of the borrowing costs applicable to the borrowings of the enterprise that are outstanding during the period)

Funds borrowed specifically for acquisition/construction/production of qualifying asset should be capitalized at the actual cost of borrowings incurred during the period the funds were so borrowed. The amount of borrowing costs to be capitalized for funds borrowed generally and utilized for the purposes of acquisition, construction or production of a qualifying assets shall be as per the following formula: A*B/C where, A = borrowing costs incurred excluding borrowing directly relatable to specific purpose B = (i) Average cost of qualifying asset as

appearing in the balance sheet on first day and last day of the previous year. OR

(ii) Where the qualifying asset does not appear in the balance sheet on first day or both on first day and last day of the previous year; half of cost of such qualifying asset OR (iii) Where the qualifying asset does not appear in the balance sheet on last day of the previous year, average of cost of such qualifying asset on first day of the previous year and on the date the said asset is put to use or completion as the case may be.

C = Average of total assets as appearing in the balance sheet on first day and last day of the previous year.

Suspension of capitalization

When development of asset/inventory is interrupted.

No such provision in ICDS. Hence capitalisation will continue even during interruption of development of asset.

Cessation of capitalization

When substantially all activities necessary to prepare asset for intended use are complete.

When asset is first put to use for qualifying asset other than inventory and in case of inventory




when substantially all the activities necessary to prepare such inventory for its intended sale are complete.

Exchange differences arising from foreign currency borrowings to the extent regarded as interest costs

Borrowing cost include exchange differences arising from foreign currency borrowings to the extent they are regarded as an adjustment to interest cost.

These are not treated as borrowing costs under ICDS.

Interest on temporary investment from borrowed funds

Interest received on temporary investments from borrowed funds is reduced from borrowing costs to be capitalised

No such provision thereby implying that the same is liable to tax which is in accordance with the judicial precedents in this regard.


Interest attributable to any tangible or intangible asset after the same is put to use is to be treated as

revenue expense.

Interest on capital contributed by partners of firms/LLP may not be considered as borrowing cost.


The assets capitalized as per books and those capitalized as per ICDS may differ on account of difference

in definition in qualifying asset, difference in timing of commencement of capitalisation, suspension and

cessation of capitalisation.

Section 36(1)(iii) of the IT Act, has been amended with effect from AY 2016-17 to provide that interest

on funds borrowed and utilized for acquisition of an asset from the date on which borrowing was

done for acquisition of the asset till the date on which such asset is put to use, would not be allowed

as deduction. Hitherto such restriction for allowability of interest was applicable only for acquisition

of asset for extension of existing business.

Disclosure in respect of the accounting policy adopted for borrowing costs and the amount of borrowing cost capitalized during the year is required to be made.

Transitional Provision:

ICDS will have impact only on interest expense incurred on or after 1st April, 2015 after taking into

account the amount of borrowing cost capitalized, if any, for the earlier years.



INCOME COMPUTATION AND DISCLOSURE STANDARD X – PROVISIONS, CONTINGENT ASSETS

AND CONTINGENT LIABILITIES

Scope:

ICDS X deals with provisions, contingent liabilities and contingent assets. This ICDS does not apply to

provisions, contingent liabilities and contingent assets resulting from financial instruments, executory

contracts, insurance business from contracts with policy-holders, and those covered by another ICDS

such as Valuation of Inventories, Construction Contracts and Revenue Recognition.

Comparison between AS and ICDS – Recognition:

AS 29 - Provisions, contingent liabilities and contingent assets.

ICDS X - Provisions, contingent liabilities and contingent assets.

For Provisions:

Provision shall be recognized when: (i) It is as a result of a past event (ii) There is a probability of an outflow of

economic resources to settle the obligation (iii) Reliable estimate can be made of the

obligation

Provision shall be recognized when: (i) It is as a result of a past event (ii) There is a reasonable certainty of an

outflow of economic resources to settle the obligation

(iii) Reliable estimate can be made of the obligation

For Contingent Liabilities:

Not to be recognized Same as AS 29

For Contingent Assets:

To be recognized if inflow of economic benefit is virtually certain

To be recognized if inflow of economic benefit is reasonably certain


No provision is to be recognized for costs to be incurred to operate in future

Provision is not to be discounted to Net Present Value

Provision for depreciation, impairment of assets and doubtful debts is not covered by this ICDS

In case of proposed law – obligation arises only when legislation is enacted

Amount recognized as provision should be best estimate of expenditure required to settle present

obligation at the end of the year. When expenditure required to settle a provision is expected to be

reimbursed, the reimbursement should be recognized based on reasonable certainty of receipt

When a person is jointly and severally liable for the obligation, it is a contingent liability to the extent it

is expected that the obligation will be settled by other parties.

All provisions, contingent liabilities and contingent assets are to be reviewed at the end of the previous

year and adjusted to reflect best estimate. Reversal of provisions is also possible.

Second proviso to Section 36(1)(vii) has been inserted in the Act to provide for deduction of bad debts,

in regard to income recognized as per the ICDS without recording in the books of account, in the year



in which such debt becomes irrecoverable. Such income is deemed to be written off in the books of

accounts.

ICDS is silent on onerous contracts


Recognition of provision on the basis of “Reasonable Certainty” as against “Probability” may result in

postponement of recognition of expenses. Recognition of income on the basis of “Reasonable

Certainty” as against “Virtual Certainty” would result in accelerated recognition of income. This could

also result in MAT mismatch. Since reasonable certainty is not defined in the Standard, it could lead to

litigation.

Following disclosures are to be made:

For each class of provision:

Brief description of nature of obligation, carrying amount at the beginning and end of the year,

additional provisions made during the year, amounts incurred and charged against the provision

during the year, unused amounts reversed during the year, and amount of any expected

reimbursement.

For each class of asset and related income:

Brief description of nature of asset, carrying amount at beginning and end of the year, additional

amounts recognized during the year, and amount reversed during the year.


Recognition of all provisions and recognition of all assets and related income should be as per the ICDS

for the previous year commencing on or after 1st April, 2015 after reducing amounts recognized, if any

earlier.



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